SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 0-17706
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QNB Corp.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2318082
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 North Third Street, Quakertown, PA 18951-9005
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (215) 538-5600
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Not Applicable
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 12, 2000
----------------------------- ---------------------------
Common Stock, par value $1.25 1,437,853
<PAGE>
QNB CORP. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Statements of Income for Three Months Ended
March 31, 2000 and 1999............................................1
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999..............................................2
Consolidated Statements of Cash Flows for Three Months Ended
March 31, 2000 and 1999............................................3
Notes to Consolidated Financial Statements............................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.................................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ...........17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ...................................................18
ITEM 2. CHANGES IN SECURITIES ...............................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .....................................18
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS...............18
ITEM 5. OTHER INFORMATION ...................................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................18
<PAGE>
QNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(in thousands, except share data)
(unaudited)
Three Months Ended March 31, 2000 1999
------ ------
<S> <C> <C>
Interest Income
Interest and fees on loans ................................. $3,461 $3,595
Interest and dividends on investment securities:
Taxable ................................................ 2,108 1,679
Tax-exempt ............................................. 319 192
Interest on Federal funds sold ............................. 16 47
Interest on interest-bearing balances ...................... 3 --
------ ------
Total interest income ............................. 5,907 5,513
------ ------
Interest Expense
Interest on deposits
Interest-bearing demand accounts ....................... 144 93
Money market accounts .................................. 214 191
Savings ................................................ 171 169
Time ................................................... 1,531 1,437
Time over $100,000 ..................................... 266 293
Interest on short-term borrowings .......................... 90 96
Interest on Federal Home Loan Bank advances ................ 325 --
------ ------
Total interest expense ............................ 2,741 2,279
------ ------
Net interest income ............................... 3,166 3,234
Provision for loan losses .................................. -- 60
------ ------
Net interest income after provision for loan losses 3,166 3,174
------ ------
Non-Interest Income
Fees for services to customers ............................. 298 266
Mortgage servicing fees .................................... 29 34
Net gain on investment securities available-for-sale ....... 66 86
Net gain on sale of loans .................................. 4 105
Other operating income ..................................... 220 182
------ ------
Total non-interest income ......................... 617 673
------ ------
Non-Interest Expense
Salaries and employee benefits ............................. 1,420 1,438
Net occupancy expense ...................................... 165 162
Furniture and equipment expense ............................ 223 206
Marketing expense .......................................... 69 91
Other expense .............................................. 495 520
------ ------
Total non-interest expense ........................ 2,372 2,417
------ ------
Income before income taxes ............................. 1,411 1,430
Provision for income taxes ................................. 316 386
------ ------
Net Income ............................................. $1,095 $1,044
====== ======
Net Income Per Share - Basic ........................... $ .76 $ .73
====== ======
Net Income Per Share - Diluted ......................... $ .76 $ .72
====== ======
Cash Dividends Per Share ............................... $ .24 $ .21
====== ======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
Page 1
<PAGE>
QNB Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands)
(unaudited)
March 31, December 31,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks .............................................. $ 12,358 $ 19,352
Investment securities
available-for-sale ............................................... 106,053 97,609
held-to-maturity (market value $46,021 and $46,572) .............. 47,673 48,302
Total loans, net of unearned income of $235 and $235 ................. 177,006 173,764
Allowance for loan losses ............................................ (3,167) (3,196)
--------- ---------
Net loans ................................................... 173,839 170,568
Premises and equipment, net .......................................... 4,928 4,840
Other real estate owned .............................................. 348 348
Accrued interest receivable .......................................... 2,178 2,045
Other assets ......................................................... 7,886 7,425
--------- ---------
Total assets ......................................................... $ 355,263 $ 350,489
========= =========
Liabilities
Deposits
Demand, non-interest-bearing ..................................... $ 35,573 $ 35,510
Interest-bearing demand accounts ................................. 48,728 47,448
Money market accounts ............................................ 31,019 30,002
Savings .......................................................... 37,258 35,660
Time ............................................................. 116,041 117,160
Time over $100,000 ............................................... 18,065 20,386
--------- ---------
Total deposits .............................................. 286,684 286,166
Short-term borrowings ................................................ 12,518 8,925
Federal Home Loan Bank advances ...................................... 25,000 25,000
Accrued interest payable ............................................. 1,458 1,420
Other liabilities .................................................... 1,653 1,516
--------- ---------
Total liabilities .................................................... 327,313 323,027
--------- ---------
Commitments and contingencies
Shareholders' Equity
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; issued 1,439,273 shares and 1,437,171 1,799 1,796
Surplus .............................................................. 4,455 4,458
Retained earnings .................................................... 24,562 23,812
Accumulated other comprehensive loss ................................. (2,866) (2,604)
--------- ---------
Total shareholders' equity ........................................... 27,950 27,462
--------- ---------
Total liabilities and shareholders' equity ........................... $ 355,263 $ 350,489
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
Page 2
<PAGE>
QNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
(unaudited)
--------------------------
Three Months Ended March 31, 2000 1999
-------- --------
<S> <C> <C>
Operating Activities
Net income .............................................................................. $ 1,095 $ 1,044
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses ............................................................. -- 60
Depreciation and amortization ......................................................... 158 143
Securities gains ...................................................................... (66) (86)
Net gain on sale of loans ............................................................. (4) (105)
Proceeds from sales of residential mortgages .......................................... 102 7,426
Originations of residential mortgages held-for-sale ................................... (134) (4,632)
Proceeds from sales of student loans .................................................. 228 143
Deferred income tax provision ......................................................... 3 10
Change in income taxes payable ........................................................ 297 376
Net increase in interest and dividends receivable ..................................... (133) (43)
Net amortization of premiums and discounts ............................................ (3) (6)
Net increase in interest payable ...................................................... 38 240
Increase in other assets .............................................................. (367) (347)
(Decrease) increase in other liabilities .............................................. (122) 1,510
-------- --------
Net cash provided by operating activities ............................................. 1,092 5,733
-------- --------
Investing Activities
Proceeds from maturities and calls of investment securities
available-for-sale .................................................................... 2,162 12,645
held-to-maturity ...................................................................... 1,314 4,306
Proceeds from sales of investment securities
available-for-sale .................................................................... 1,643 183
Purchase of investment securities
available-for-sale .................................................................... (12,576) (16,596)
held-to-maturity ...................................................................... (686) (4,008)
Net increase in Federal funds sold ...................................................... -- (3,617)
Net increase in loans ................................................................... (3,463) (5,180)
Net purchases of premises and equipment ................................................. (246) (112)
-------- --------
Net cash used by investing activities ................................................. (11,852) (12,379)
-------- --------
Financing Activities
Net increase in non-interest-bearing deposits ........................................... 63 37
Net increase in interest-bearing deposits ............................................... 455 6,258
Net increase (decrease) in short-term borrowings ........................................ 3,593 (1,607)
Cash dividends paid ..................................................................... (345) (301)
Proceeds from issuance of common stock .................................................. -- 3
-------- --------
Net cash provided by financing activities ............................................. 3,766 4,390
-------- --------
Decrease in cash and cash equivalents ................................................. (6,994) (2,256)
Cash and cash equivalents at beginning of year ........................................ 19,352 14,020
-------- --------
Cash and cash equivalents at end of period ............................................ $ 12,358 $ 11,764
======== ========
Supplemental Cash Flow Disclosures
Interest paid ........................................................................... $ 2,703 $ 2,039
Income taxes paid ....................................................................... -- --
Non-Cash Transactions
Change in net unrealized holding gains (losses), net of taxes, on investment securities (262) (614)
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
Page 3
<PAGE>
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 AND 1999, AND DECEMBER 31, 1999
(Unaudited)
1. REPORTING AND ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of QNB
Corp. and its wholly owned subsidiary, The Quakertown National Bank, (QNB). All
significant intercompany accounts and transactions are eliminated in the
consolidated statements.
The consolidated balance sheet as of March 31, 2000, as well as the respective
statements of income and cash flows for the three month period ended March 31,
2000 and 1999, are unaudited. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
QNB's 1999 Annual Report incorporated in the Form 10-K.
The financial statements reflect all adjustments, which in the opinion of
management are necessary for a fair presentation of the results of the interim
periods and are of a normal and recurring nature. The results for the periods
presented are not necessarily indicative of the full year. Certain accounts in
last year's financial statements have been reclassified to conform to the
current year's presentation. These reclassifications had no effect on net
income.
2. PER SHARE DATA
The following sets forth the computation of basic and diluted earnings per share
(share and per share data are not in thousands):
For the Three Months
Ended March 31,
-------------------------
2000 1999
--------- ---------
Numerator for basic and diluted earnings $1,095 $1,044
per share-net income
Denominator for basic earnings per share- 1,439,227 1,434,459
weighted average shares outstanding
Effect of dilutive securities-
employee stock options -- 9,689
Denominator for diluted earnings per 1,439,227 1,444,148
share-adjusted weighted average
shares outstanding
Earnings per share-basic $ .76 $ .73
Earnings per share-diluted $ .76 $ .72
There were 45,900 stock options that were anti-dilutive at March 31, 2000.
4
<PAGE>
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999, AND DECEMBER 31, 1999
(Unaudited)
3. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business entity
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. For QNB, the
sole component of other comprehensive income is the unrealized holding gains and
losses on available-for-sale investment securities.
The following shows the components and activity of comprehensive income during
the periods ended March 31, 2000 and 1999 (net of the income tax effect):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
2000 1999
------- ------
<S> <C> <C>
Unrealized holding losses arising during
the period on securities held $ (218) $ (557)
Reclassification adjustment equal to
beginning unrealized for all sold securities (44) (57)
Net change in unrealized during the period (262) (614)
Unrealized holding (losses) gains, beginning of period (2,604) 916
------- ------
Unrealized holding (losses) gains, end of period $(2,866) $ 302
======= ======
Net income $ 1,095 $1,044
Other comprehensive (loss) income, net of tax:
Unrealized holding losses arising during the period (262) (614)
------- ------
Comprehensive Income $ 833 $ 430
======= ======
</TABLE>
5
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
QNB Corp. (the "Corporation") is a bank holding company headquartered in
Quakertown, Pennsylvania which provides a full range of commercial and retail
banking services through its banking subsidiary, The Quakertown National Bank
(the "Bank"), a 122 year old community bank with locations in Upper Bucks,
Northern Montgomery and Southern Lehigh Counties. The results of operations and
financial condition discussed herein are presented on a consolidated basis and
the consolidated entity is referred to herein as "QNB."
In addition to historical information, this management discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Corporation undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Corporation files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
filed by the Corporation in 2000, and any Current Reports on Form 8-K filed by
the Corporation.
RESULTS OF OPERATIONS
QNB recorded record earnings of $1,095,000 or $.76 per share on a diluted basis
for the three month period ended March 31, 2000. This represents a 4.9 percent
increase from net income of $1,044,000 or $.72 per share-diluted reported for
the first quarter of 1999.
A reduction in non-interest expense and the decision not to increase the
allowance for loan losses contributed to the increase in net income. The
continued low levels of non-performing assets enabled QNB to eliminate its
provision for loan loss during the first quarter of 2000. This expense was
$60,000 during the first quarter of 1999.
Net interest income on a tax-equivalent basis was level despite a 10.6 percent
increase in average earning assets. Net interest income was negatively impacted
by a lower net interest margin which declined from 4.58 percent during the first
quarter of 1999 to 4.11 percent for the first quarter of 2000. Excluding the
impact of a wholesale funding transaction entered into during the second quarter
of 1999, the net interest margin for the first quarter of 2000 would have been
4.33 percent, a decrease of 25 basis points from the first quarter of 1999.
Interest rates on deposit accounts and other funding sources has increased to a
greater degree than rates on loans and investment securities as market interest
rates have increased.
Non-interest income decreased from $673,000 for the first quarter of 1999 to
$617,000 for the first three months ended March 31, 2000, a decrease of 8.3
percent. Excluding the gains and losses on the sale of investment securities and
loans during both periods, non-interest income increased approximately $65,000
or 13.5 percent. Gains on the sale of loans were $4,000 in the first quarter of
2000 as compared to $105,000 during the same period in 1999. Rising interest
rates during late 1999 and early 2000 reduced the amount of mortgage origination
and sales activity.
6
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS (Continued)
Return on average assets was 1.25 percent and 1.32 percent while the return on
average equity was 14.53 percent and 15.18 percent for the quarters ended March
31, 2000 and 1999, respectively.
NET INTEREST INCOME
Net interest income is the primary source of operating income for QNB. Net
interest income is interest income, dividends, and fees on earning assets, less
interest expense incurred for funding sources. Earning assets primarily include
loans, investment securities and Federal funds sold. Sources used to fund these
assets include deposits, borrowed funds and shareholders' equity. Net interest
income is affected by changes in interest rates, the volume and mix of earning
assets and interest-bearing liabilities, and the amount of earning assets funded
by non-interest-bearing deposits.
Net interest income decreased 2.1 percent to $3,166,000 for the quarter ended
March 31, 2000 as compared to $3,234,000 for the quarter ended March 31, 1999.
However, on a tax-equivalent basis, which allows for the comparison of
tax-exempt loans and investments to taxable loans and investments, net interest
income increased by .1 percent from $3,384,000 for the three months ended March
31, 1999 to $3,388,000 for the same period ended March 31, 2000. This is a
result of an increase in the proportion of tax-exempt earning assets to total
earning assets. The yield on earning assets on a tax-equivalent basis was 7.44
percent for the first quarter of 2000 versus 7.67 percent for the first quarter
of 1999, while the rate paid on interest-bearing liabilities was 3.87 percent
and 3.63 percent for the same periods. Declining yields on earning assets
combined with higher rates on funding sources resulted in a decline in the net
interest margin. The net interest margin on a tax-equivalent basis declined 47
basis points to 4.11 percent for the three-month period ended March 31, 2000
compared with 4.58 percent for the same period in 1999. A 10.6 percent increase
in average earning assets helped offset the negative impact of a falling net
interest margin.
Some of the growth in average earning assets was funded through a wholesale
funding transaction entered into in April 1999, whereby QNB borrowed $25,000,000
from the Federal Home Loan Bank at an average rate of 5.15 percent. These funds
were reinvested in investment securities with an average yield of 6.52 percent
for an initial spread of 137 basis points. This transaction has the impact of
increasing net interest income, but lowering the net interest margin. Excluding
the impact of this transaction, the net interest margin for the first quarter of
2000 would have been 4.33 percent.
The yield on earning assets declined when comparing the two quarters despite
generally rising interest rates, as represented by the United States Treasury
yield curve, during the later part of 1999 and early 2000. The decline in the
yield on earning assets is primarily centered in loans, whose yield declined
from 8.37 percent for the first quarter of 1999 to 8.15 percent for the first
quarter of 2000. This occurred in spite of the 100 basis point increase in the
prime rate during this period. While QNB will see some benefit in 2000 from
these prime rate increases, the overall yield on the loan portfolio will not
increase proportionately since only approximately 13 percent of the portfolio
re-prices immediately with changes in the prime rate. The current yield on loans
has been negatively impacted by the decline in rates that occurred in 1998. As
rates hit historically low levels during 1998, many borrowers, including
commercial and consumer, selected fixed rate rather than variable rate loans.
Therefore, the loan portfolio has yielded minimal benefit from rising rates
during 1999 and 2000. Another factor in the decline in the yield on loans is the
current competitive environment for loans, both commercial and consumer, from
both banks and non-banks, which has prevented the rates from increasing to the
degree that Treasury rates have increased. QNB anticipates that the yield on
7
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NET INTEREST INCOME (Continued)
loans will increase during 2000 as the impact of the increase in market interest
rates are factored into new loans as well as the impact of these higher rates on
loans that do re-price over time. Some of this impact has been realized as the
yield on loans for the first quarter of 2000 of 8.15 percent was an increase
from the 8.11 percent for the fourth quarter of 1999.
When comparing the first quarter of 2000 to the first quarter of 1999, the yield
on investment securities decreased slightly to 6.66 percent from 6.69 percent.
QNB has been able to maintain the yield on investment securities through various
interest rate environments by actively managing its portfolio. When rates fell
in 1998 and cash flow increased as a result of prepayments on mortgage-backed
securities and callable agency securities, QNB was able to reduce the negative
impact on the yield in 1998 and 1999 by purchasing mortgage-backed securities,
whose yields did not decline to the same degree as Treasury securities and by
lengthening the average life of the portfolio with the purchase of some higher
yielding but longer term callable agency securities and tax-exempt municipal
securities. With the rise in rates in 1999, cash flow from mortgage-backed
securities and callable agency securities slowed resulting in fewer dollars
being reinvested at the higher rates. To take advantage of the higher interest
rate environment, QNB, during the third and fourth quarters of 1999, sold, at a
loss of $256,000, approximately $9,500,000 of securities yielding 6.25%, and
reinvested the proceeds in securities yielding 7.50 percent. This transaction
benefited QNB by increasing interest income in 2000. Also positively impacting
the yield during the first quarter of 2000 was the reinvestment of the excess
liquidity created by the Year 2000 issue at these higher interest rates. The
positive results of these transactions are evidenced by the 14 basis point
increase in the yield on the investment portfolio during the first quarter of
2000 from the yield recorded during the fourth quarter of 1999. The yield on the
investment portfolio during the fourth quarter of 1999 was 6.52 percent compared
to 6.66 percent for the first quarter of 2000.
Total interest expense increased $462,000 during the first quarter of 2000 to
$2,741,000. Interest expense on the borrowings from the Federal Home Loan Bank
contributed $325,000 to the increase. Rising market interest rates combined with
the competition for deposits caused rates on both deposits, primarily time
deposits, and short-term borrowings, primarily cash management accounts and
Federal funds sold, to increase when comparing the two quarters. The yield on
interest bearing deposits increased from 3.64 percent to 3.74 percent while the
yield on short-term borrowings increased from 3.35 percent to 3.72 percent for
the quarters ended March 31, 1999 and 2000. The introduction of a new money
market account toward the end of the first quarter of 2000, Treasury Select
Indexed Money Market Account, contributed to the $23,000 increase in interest
expense on money market accounts. This product is a variable rate account
indexed to a percentage of the monthly average of the 91-day Treasury bill yield
based on balances in the account. This product was introduced with a minimum
5.00 percent yield through the end of 2000 for accounts with balances over
$25,000.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents management's determination of the
amount necessary to be charged to operations to bring the allowance for loan
losses to a level considered adequate in relation to the risk of known and
inherent losses in the loan portfolio. Actual loan losses, net of recoveries,
serve to reduce the allowance.
8
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES (Continued)
The determination of an appropriate level of the allowance for loan losses is
based upon an analysis of the risk inherent in QNB's loan portfolio. Management
uses various tools to assess the adequacy of the allowance for loan losses. One
tool is a model recommended by the Office of the Comptroller of the Currency.
This model considers a number of relevant factors including: historical loan
loss experience, the assigned risk rating of the credit, current and projected
credit worthiness of the borrower, current value of the underlying collateral,
levels of and trends in delinquencies and non-accrual loans, trends in volume
and terms of loans, concentrations of credit, and national and local economic
trends and conditions. This model is supplemented with another analysis that
also incorporates exceptions to QNB's loan policy and QNB's portfolio exposure
to borrowers with large dollar concentration, defined as exceeding 25% of QNB's
legal lending limit. Other tools include ratio analysis and peer group analysis.
The provision for loan losses was zero for the quarter ended March 31, 2000
compared to $60,000 for the first quarter of 1999. QNB was able to eliminate the
provision for loan losses during the first quarter of 2000 as a result of
continued low levels of non-performing assets and delinquency. QNB had net
charge-offs of $29,000 during the first quarter of 2000 versus net recoveries of
$5,000 for the first quarter of 1999.
Non-performing assets (non-accruing loans, loans past due 90 days or more, and
other real estate owned) remained low amounting to .28 percent of total assets
at March 31, 2000. This compares to .34 percent at March 31, 1999 and .25
percent at December 31, 1999. Non-accrual loans were $627,000 and $379,000 at
March 31, 2000 and 1999. Non-accrual loans at December 31, 1999 were $484,000.
Other real estate owned was $348,000 at both March 31, 2000 and December 31,
1999 compared to $696,000 at March 31, 1999.
There were no restructured loans as of March 31, 2000, December 31, 1999 or
March 31, 1999 as defined in Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," that
have not already been included in loans past due 90 days or more or non-accrual
loans.
The allowance for loan losses was $3,167,000 and $3,196,000 at March 31, 2000
and December 31, 1999, respectively. The ratio of the allowance to total loans
was 1.79 percent and 1.84 percent for the respective periods. While QNB believes
that its allowance is adequate to cover losses in the loan portfolio, there
remain inherent uncertainties regarding future economic events and their
potential impact on asset quality.
A loan is considered impaired, based on current information and events, if it is
probable that QNB will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral.
At March 31, 2000 and 1999, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled $561,000
and $315,000, respectively, of which $511,000 and $306,000 related to loans with
no valuation allowance. At March 31, 2000 and 1999 there were $50,000 and $9,000
in impaired loans that had a valuation allowance against the entire amount. Most
of the loans identified as impaired are collateral-dependent.
9
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME
QNB, through its core banking business, generates various fees and service
charges. Total non-interest income is composed of service charges on deposit
accounts, mortgage servicing fees, gains on the sale of investment securities,
gains on the sale of residential mortgages and student loans, and other
miscellaneous fee income. QNB reviews all service charges and fee schedules
related to its products and services on an annual basis. Except for an increase
in overdraft fees during the first quarter of 1999, QNB has not materially
changed these fee schedules during 1999 or 2000. Total non-interest income
decreased $56,000 or 8.3 percent to $617,000 for the quarter ended March 31,
2000 when compared to March 31, 1999. Excluding gains and losses on the sale of
investment securities and loans during both periods, non-interest income
increased approximately $65,000 or 13.5 percent.
Fees for services to customers, the largest component of total non-interest
income, is primarily comprised of service charges on deposit accounts. These
fees increased 12.0 percent, to $298,000 from $266,000, when comparing the two
quarters. An increase in overdraft fee income account for $31,000 of the
increase. During the first quarter of 1999 QNB increased its fee for overdrafts
by 12.0 percent.
To date, when QNB sells its residential mortgages in the secondary market, it
retains servicing rights. A normal servicing fee is retained on all mortgage
loans sold and serviced. Mortgage servicing fees for the quarter ended March 31,
2000 were $29,000 which represents a $5,000 decline from the same period in
1999. The decrease in mortgage servicing fees for the quarter is partially a
result of an increase in the amortization of the mortgage servicing asset booked
at the time the loan is sold. QNB recognizes its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset. The servicing asset is amortized in proportion to and over a period of
net servicing income or loss. Servicing assets are assessed for impairment based
on their fair value. During the first quarter of 2000, QNB amortized
approximately $12,000 of the mortgage servicing asset compared to $10,000 during
the first quarter of 1999. The average balance of mortgages serviced for others
was $65,097,000 for the first quarter of 2000 compared to $67,527,000 for the
first quarter of 1999, a decline of 3.6 percent. Rising interest rates have
reduced the amount of mortgage origination and sales activity. The timing of
mortgage payments and delinquencies also impacts the amount of servicing fees
recorded.
Gains on the sale of investment securities were $66,000 for the first quarter of
2000, compared to $86,000 for the first three months of 1999. QNB owns a small
portfolio of marketable equity securities, bank stocks. During the first quarter
of 2000 QNB sold a holding with a cost basis of $75,000 at a gain of $66,000.
This compares to a similar sale during the first quarter of 1999 when QNB sold
securities with a cost basis of $97,000 for a gain of $86,000.
QNB recorded a gain of $4,000 on the sale of loans during the first quarter of
2000. This compares to a $105,000 gain for the same period in 1999. The sale of
residential mortgages and the sale of student loans accounts for $1,000 and
$3,000 of the gains, respectively in 2000. For the same period in 1999 the sale
of residential mortgage loans accounted for $102,000 of the gain while the sale
of student loans represented $3,000 of the gain. QNB sold approximately $225,000
and $140,000 in student loans during the first quarter of 2000 and 1999.
The net gain on residential mortgage sales is directly related to the volume of
mortgages sold and the timing of the sales relative to the interest rate
environment. Rising interest rates during late 1999 and early 2000 reduced the
amount of mortgage origination and sales activity. QNB originated $134,000 and
$4,632,000 in
10
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (Continued)
mortgages held for sale during the first quarter of 2000 and 1999. Proceeds from
the sale of residential mortgages were approximately $102,000 and $7,426,000
during the first quarter of 2000 and 1999. Declining interest rates at the end
of 1998 presented an opportunity for many borrowers to refinance their mortgages
at lower rates. This provided an opportunity for QNB to originate and sell more
mortgages. The increase in interest rates during the first quarter of 1999,
prevented QNB from selling these loans at even a larger gain. As of March 31,
2000 QNB had approximately $32,000 in mortgage loans classified as held for
sale. These loans are accounted for at lower of cost or market.
Other operating income increased $38,000 to $220,000 when comparing the
three-month periods ended March 31, 2000 and 1999. Higher debit card income
resulting from an increase in the number of transactions, contributed $21,000 to
the increase in other income. Higher commission income on check orders, safe
deposit rental income and earnings on official checks also contributed to the
increase in other income. A decline in the recognition of rental income on other
real estate owned of $9,000 partially offset some of these positive variances.
The rental income decreased as a result of the sale of some revenue generating
properties.
The development of new products and services should help generate additional
non-interest income. An example was the introduction of QNB-Online, our Internet
Banking and online bill-pay product, at the end of the first quarter of 2000.
NON-INTEREST EXPENSE
Non-interest expense is comprised of costs related to salaries and employee
benefits, net occupancy, furniture and equipment, marketing, and various other
operating expenses. Total non-interest expense of $2,372,000 for the quarter
ended March 31, 2000 represents a decrease of $45,000 or 1.9 percent from levels
reported in the first quarter of 1999.
Salaries and benefits, the largest component of non-interest expense, decreased
$18,000 or 1.3 percent to $1,420,000 for the quarter ended March 31, 2000
compared to the same quarter in 1999. Salaries expense decreased $4,000 during
the period to $1,140,000 while benefits expense decreased $14,000 or 4.8 percent
to $280,000. Excluding the accrual for bonuses in both years, salary expense
increased 2.9 percent. The decrease in benefits expense is primarily the result
of a reduction in QNB's State unemployment tax rate.
Net occupancy expense increased $3,000 or 1.9 percent while furniture and
equipment expense increased $17,000 or 8.3 percent when comparing the
three-month periods ended March 31, 2000 and 1999, respectively. An increase in
utility costs and depreciation expense on the branch renovated at the end of
1999 were partially offset by lower building security costs and real estate
taxes. Net occupancy expense will likely continue to increase during 2000 as a
result of both higher depreciation expense and branch rent expense. These
increased costs relate to the renovation and expansion of an existing branch
location at the end of 1999, as well as the opening of a new branch location in
Hilltown Township, Pennsylvania anticipated in the fall of 2000. The higher
branch rent expense for the existing branch began in the second quarter of 2000.
The increase in furniture and equipment expense during the first quarter of 2000
is centered in depreciation and maintenance expense. The higher depreciation
relates to the continued investment in technology as well as costs related to
the renovation of the branch. QNB-Online, the check imaging system, the wide
area network and the
11
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST EXPENSE (Continued)
telephone system are some examples of the technology implemented in the past two
years. The increase in equipment maintenance costs relates to general increases
in contract pricing as well as additional costs for maintenance on new systems.
Furniture and equipment expense will increase during 2000 and 2001 as the new
branch is put into service and a new core processing system is installed.
Marketing expense decreased $22,000 or 24.2 percent to $69,000 for the quarter
ended March 31, 2000. A $12,000 reduction in donations and a $11,000 decrease in
promotion expense contributed to the decrease. Both of these variances are
related to the timing of when these expenses will be incurred.
Total other expense for the three months ended March 31, 2000 was $495,000, a
decrease of $25,000 or 4.8 percent over the same period in 1999. The major
categories that comprise other expense are postage, supplies, professional
services, telecommunications costs, insurance expense and state taxes. Lower
legal, supply, external service provider and State tax expenses were partially
offset by increases in postage costs, debit card expense as well as the costs
related to the outsourcing of the internal audit, loan review and compliance
functions.
INCOME TAXES
Applicable income taxes and effective tax rates were $316,000 or 22.4 percent
for the three-month period ended March 31, 2000, and $386,000 or 27.0 percent
for the same period in 1999. The reduction in the effective tax rate when
comparing 2000 to 1999 is a result of an increase in income from tax-exempt
municipal securities and loans.
QNB utilizes an asset and liability approach for financial accounting and
reporting of income taxes. As of March 31, 2000 QNB's net deferred tax asset was
$2,466,000. A deferred tax asset of $833,000 relating to the allowance for loan
losses and 1,476,000 resulting from the SFAS No.115 adjustment for
available-for-sale investment securities account for most of the deferred tax
asset. As of March 31, 1999 QNB's net deferred tax asset was $814,000. A
deferred tax asset of $782,000 related to the allowance for loan losses was
partially offset by a deferred tax liability of $156,000 resulting from the SFAS
No. 115 adjustment.
BALANCE SHEET ANALYSIS
The Balance Sheet Analysis reviews average balance sheet data for the three
months ended March 31, 2000 and 1999, as well as the period ended balances as of
March 31, 2000 and December 31, 1999.
Average earning assets for the three-month period ended March 31, 2000 increased
$31,899,000 or 10.6 percent to $331,494,000 from $299,595,000 for the quarter
ended March 31, 1999. Average investments increased $37,092,000 while average
loans and Federal funds sold decreased $3,163,000 and $2,265,000. The large
increase in the investment portfolio is a result of the growth in funding
sources, both retail and wholesale, outpacing the growth in loans. The advance
from the Federal Home Loan Bank funded $25,000,000 of the increase in average
investments when comparing the two quarters.
Average commercial loans and mortgage loans declined $2,462,000 and $3,898,000
when comparing the three-month periods. However, average consumer loans, which
includes home equity loans, increased
12
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS (Continued)
$3,685,000 during this same timeframe. The decline in the average balance of
mortgage loans is a result of rising interest rates which has slowed down the
origination of both new mortgages and refinances. The increase in consumer loans
is the result of aggressive fixed rate home equity loan promotions and pricing.
In addition to borrowing from the Federal Home Loan Bank, the growth in average
earning assets was funded by a reduction in cash retained for Year 2000 concerns
and increases in interest-bearing demand accounts and time deposits. Average
interest-bearing demand accounts increased $3,951,000, while average
time-deposits increased $4,124,000. Attractive rates on time deposits, relative
to rates on other interest-bearing accounts along with the promotion of several
time deposit specials during the last half of 1999 and first quarter of 2000
contributed to the increase in time deposits. Average cash management balances
decreased $2,383,000 when comparing the two quarters. Some of these balances
were transferred to time deposits during 1999 as a result of the higher rates
being paid on time deposits. Average total deposits increased 2.2 percent when
comparing the three-month periods.
Total assets at March 31, 2000 were $355,263,000, compared with $350,489,000 at
December 31, 1999, an increase of 1.4 percent for the quarter. Total deposits
increased from $286,166,000 at December 31, 1999 to $286,684,000 at March 31,
2000 while short-term borrowings increased from $8,925,000 to $12,518,000 at
these same dates. The increase in assets from December 31, 1999 to March 31,
2000 is primarily centered in investment securities and loans which increased
$7,815,000 and $3,242,000. The increase in investment securities is primarily
the result of the redeployment of excess Year 2000 cash while the increase in
loans is the result of both new loans and seasonal line of credit usage.
At March 31, 2000 the fair value of investment securities available-for-sale was
$106,053,000 or $4,344,000 above the amortized cost of $110,397,000. This
compares to a fair value of $97,609,000 or $3,947,000 below the amortized cost
of $101,556,000 at December 31, 1999. An unrealized holding loss, net of taxes,
of $2,866,000 and $2,604,000 was recorded as a decrease to shareholders' equity
at March 31, 2000 and December 31, 1999. The continued increase in interest
rates, combined with the inverted shape of the yield curve as well as the
purchase of some mortgage-backed securities during the first quarter of 2000
contributed to the increase in the unrealized holding loss.
The available-for-sale portfolio had a weighted average maturity of
approximately 7 years and 5 months at March 31, 2000 and 7 years at December 31,
1999. The weighted average tax-equivalent yield was 6.73 percent and 6.58
percent at March 31, 2000 and December 31, 1999. The weighted average maturity
is based on the stated contractual maturity of all securities except for
mortgage-backed securities, which are based on estimated average life. The
maturity of the portfolio may be shorter because of call features in many debt
securities and because of prepayments on mortgage-backed securities. The
interest rate sensitivity analysis reflects the expected maturity distribution
of the securities portfolio based upon estimated call dates and anticipated cash
flows assuming management's most likely interest rate environment. The expected
weighted average life of the available-for-sale portfolio was 6 years, 10 months
at March 31, 2000 and 6 years, 6 months at December 31, 1999, based on these
assumptions. The slight extension of the expected average life of the portfolio
is a result of the purchase of some longer term mortgage-backed securities and
the rise in interest rates.
Investment securities held-to-maturity are reported at amortized cost. As of
March 31, 2000 and December 31, 1999, QNB had securities classified as
held-to-maturity with an amortized cost of $47,673,000 and $48,302,000 and a
market value of $46,021,000 and $46,572,000, respectively. The held-to-maturity
portfolio had a weighted average maturity of approximately 6 years at both March
31, 2000 and December 31, 1999.
13
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY
Liquidity represents an institution's ability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers and demands
of depositors. QNB manages its mix of cash, Federal funds sold, investment
securities and loans in order to match the volatility, seasonality, interest
sensitivity and growth trends of its deposit funds. Liquidity is provided from
asset sources through maturities and repayments of loans and investment
securities, net interest income and fee income. The portfolio of investment
securities available-for-sale and QNB's policy of selling certain residential
mortgage originations and student loans in the secondary market also provide
sources of liquidity. Additional sources of liquidity are provided by The
Quakertown National Bank's membership in the Federal Home Loan Bank and a
$5,000,000 unsecured Federal funds line granted by the Bank's correspondent.
Cash and due from banks, Federal funds sold, available-for-sale securities and
loans held-for-sale were $120,312,000 and $118,196,000 at March 31, 2000 and
December 31, 1999. These sources were adequate to meet seasonal deposit
withdrawals during the first quarter of 2000 and should be adequate to meet
normal fluctuations in loan demand and or deposit withdrawals. Approximately
$43,944,000 and $43,963,000 of available-for-sale securities at March 31, 2000
and December 31, 1999 were pledged as collateral for repurchase agreements and
deposits of public funds as required by law.
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. QNB's cash and
cash equivalents decreased $6,994,000 to $12,358,000 at March 31, 2000. This
compares to a $2,256,000 decrease during the first three months of 1999. The
large decrease during the first three months of 2000 is a result of liquidity
planning for potential Year 2000 concerns. QNB increased cash at the end of 1999
as a contingency plan for any potential Year 2000 problems. This excess cash was
reinvested in investment securities in January and February of 2000 after Year
2000 concerns passed.
After adjusting net income for non-cash transactions, operating activities
provided $1,092,000 in cash flow in the first three months of 2000, compared to
$5,733,000 in the same period of 1999. A higher volume of residential mortgage
loan activity in 1999 as well as an increase in other liabilities in 1999
accounted for most of the difference between the periods.
Net cash used by investing activities was $11,852,000 during the first quarter
of 2000. The purchase of investment securities exceeded the maturity, call and
sale of securities by $8,143,000 during the first quarter of 2000. Most of this
activity relates to the reinvestment of the excess Year 2000 cash buildup. With
the increase in interest rates at the end of 1999 and early 2000, cash flow from
mortgage-backed securities and from callable bonds slowed, reducing liquidity
and the amount of cash available for reinvestment. A net increase in loans of
$3,463,000 was also a use of cash during the first quarter of 2000. Net cash
used by investing activities was $12,379,000 during the first three months of
1999. An increase in Federal funds sold of $3,617,000 and loans of $5,180,000
were a use of cash. The purchase of investment securities exceeded the maturity,
call and sale of securities by $3,470,000 during the first quarter of 1999.
Net cash provided by financing activities was $3,766,000 during the first
quarter of 2000 and $4,390,000 during the first quarter of 1999. Short-term
borrowings increased $3,593,000 during the first quarter of 2000, with cash
management accounts increasing $2,152,000 and Federal funds purchased increasing
$1,332,000 during this period. The increase in Federal funds purchased is a
result of the growth in assets exceeding the growth in deposits. The increase in
cash provided by financing activities in 1999 was the result of an increase in
interest-bearing deposits, primarily time deposits. A decline in short-term
borrowings of $1,607,000 was a use of cash during the first quarter of 1999.
14
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
CAPITAL ADEQUACY
A strong capital position is fundamental to support continued growth and
profitability, to serve the needs of depositors, and to yield an attractive
return for shareholders. QNB's shareholders' equity at March 31, 2000 was
$27,950,000 or 7.87 percent of total assets compared to shareholders' equity of
$27,462,000 or 7.84 percent at December 31, 1999. Shareholders' equity at March
31, 2000 includes a negative adjustment of $2,866,000 related to unrealized
holding losses, net of taxes, on investment securities available-for-sale, while
shareholders' equity at December 31, 1999 includes a negative adjustment of
$2,604,000. Without these adjustments shareholders' equity to total assets would
have been 8.67 percent and 8.58 percent at March 31,2000 and December 31, 1999.
Shareholders' equity averaged $30,320,000 for the first three months of 2000 and
$28,880,000 during all of 1999, an increase of 5.0 percent. The ratio of average
total equity to average total assets improved to 8.61 percent for 2000, compared
to 8.38 percent for 1999. The increase in the equity to asset ratio is a
function of higher net income and modest growth in average assets since the end
of 1999.
QNB Corp. and the Quakertown National Bank are subject to various regulatory
capital requirements as issued by Federal regulatory authorities. Regulatory
capital is defined in terms of Tier I capital (shareholders' equity excluding
unrealized gains or losses on available-for-sale securities), Tier II capital
which includes a portion of the allowance for loan losses, and total capital
(Tier I plus II). Risk-based capital ratios are expressed as a percentage of
risk-weighted assets. Risk-weighted assets are determined by assigning various
weights to all assets and off-balance sheet arrangements, such as letters of
credit and loan commitments, based on associated risk. Regulators have also
adopted minimum Tier I leverage ratio standards, which measure the ratio of Tier
I capital to total assets.
The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
for the total risk-based and 4.00 percent for leverage. Under the requirements,
QNB has a Tier I capital ratio of 15.14 percent and 15.25 percent, a total
risk-based ratio of 16.39 percent and 16.50 percent and a leverage ratio of 8.57
percent and 8.38 percent at March 31, 2000 and December 31, 1999, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At March 31, 2000 and December 31, 1999 QNB met the "well
capitalized" criteria which requires minimum Tier I and total risk-based capital
ratios of 6.00 percent and 10.00 percent, respectively and a Tier I leverage
ratio of 5.00 percent.
On March 30, 2000, the Board of Directors of QNB Corp. approved a plan to
repurchase up to 4.99% of QNB Corp's shares of outstanding common stock in open
market and privately negotiated transactions. As of May 12, 2000, 1,420 shares
have been repurchased.
INTEREST RATE SENSITIVITY
Since the assets and liabilities of QNB have diverse repricing characteristics
that influence net interest income, management analyzes interest sensitivity
through the use of gap analysis and simulation models. Interest rate sensitivity
management seeks to minimize the effect of interest rate changes on net interest
margins and interest rate spreads, and to provide growth in net interest income
through periods of changing
15
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (Continued)
interest rates. The Asset/Liability Management Committee (ALCO) is responsible
for managing interest rate risk and for evaluating the impact of changing
interest rate conditions on net interest income. Gap analysis measures the
difference between volumes of rate-sensitive assets and liabilities and
quantifies these repricing differences for various time intervals. Static gap
analysis describes interest rate sensitivity at a point in time. However, it
alone does not accurately measure the magnitude of changes in net interest
income since changes in interest rates do not impact all categories of assets
and liabilities equally or simultaneously. Interest rate sensitivity analysis
also involves assumptions on certain categories of assets and deposits. For
purposes of interest rate sensitivity analysis, assets and liabilities are
stated at their contractual maturity, estimated likely call date, or earliest
repricing opportunity. Mortgage-backed securities and amortizing loans are
scheduled based on their anticipated cash flow. Savings accounts, including
passbook, statement savings, money market, and interest-bearing demand accounts,
do not have a stated maturity or repricing term and can be withdrawn or repriced
at any time. This may impact QNB's margin if more expensive alternative sources
of deposits are required to fund loans or deposit runoff. Management projects
the repricing characteristics of these accounts based on historical performance
and assumptions that it believes reflect their rate sensitivity. A positive gap
results when the amount of interest rate sensitive assets exceeds interest rate
sensitive liabilities. A negative gap results when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets.
QNB also uses a simulation model to assess the impact of changes in interest
rates on net interest income. The model reflects management's assumptions
related to asset yields and rates paid on liabilities, deposit sensitivity, and
the size, composition and maturity or repricing characteristics of the balance
sheet. The assumptions are based on what management believes at that time to be
the most likely interest rate environment. Management also evaluates the impact
of higher and lower interest rates.
Management believes that the assumptions utilized in evaluating the
vulnerability of QNB's net interest income to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of QNB's
assets and liabilities as well as the estimated effect of changes in interest
rates on net interest income could vary substantially if different assumptions
are used or actual experience differs from the experience on which the
assumptions were based.
In the event QNB should experience a mismatch in its desired gap ranges or an
excessive decline in its net interest income subsequent to an immediate and
sustained change in interest rates, it has a number of options which it could
utilize to remedy such a mismatch. QNB could restructure its investment
portfolio through the sale or purchase of securities with more favorable
repricing attributes. It could also emphasize loan products with appropriate
maturities or repricing attributes, or it could attract deposits or obtain
borrowings with desired maturities.
No material changes in QNB's interest rate risk, market risk or strategies
occurred during the current period. A detailed discussion of market risk is
provided in the Form 10-K for the period ended December 31, 1999.
The nature of QNB's current operation is such that it is not subject to foreign
currency exchange or commodity price risk. Additionally, neither the Corporation
nor the Bank owns trading assets. At March 31, 2000, QNB did not have any
hedging transactions in place such as interest rate swaps, caps or floors.
OTHER ITEMS
Management is not aware of any current specific recommendations by regulatory
authorities or proposed legislation, which if they were implemented, would have
a material adverse effect upon the liquidity, capital resources, or results of
operations, although the general cost of compliance with numerous and multiple
federal and state laws and regulations does have, and in the future may have, a
negative impact on QNB's results of operations.
16
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required herein is set forth in Item 2, above.
17
<PAGE>
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
MARCH 31, 2000
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are included in this Report:
Exhibit 3.1 Articles of Incorporation of Registrant, as amended.
(Incorporated by reference to Exhibit 3.1 of Registrants
Form 10-Q filed with the Commission on August 13,1998).
Exhibit 3.2 Bylaws of Registrant, as amended. (Incorporated by reference
to Exhibit 3.1 of Registrants Form 10-Q filed with the
Commission on August 13,1998).
Exhibit 10.1 Employment Agreement between the Registrant and Thomas J.
Bisko. (Incorporated by reference to Exhibit 10.1 of
Registrants Form 10-K filed with the Commission on
March 31, 1999).
Exhibit 10.2 Salary Continuation Agreement between the Registrant and
Thomas J. Bisko. (Incorporated by reference to Exhibit 10.2 of
Registrants Form 10-K filed with the Commission on
March 31, 1999).
18
<PAGE>
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
MARCH 31, 2000
Item 6. Exhibits and Reports on Form 8-K (Continued)
Exhibit 10.3 QNB Corp. 1998 Stock Incentive Plan. (Incorporated by
reference to Exhibit 4.3 to Registration Statement
No. 333-91201 on Form S-8, filed with the Commission on
November 18, 1999).
Exhibit 10.4 QNB Corp. 1988 Stock Incentive Plan. (Incorporated by
reference to Exhibit 4A to Registration Statement
No. 333-16627 on Form S-8, filed with the Commission on
November 22, 1996).
Exhibit 10.5 QNB Corp. Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 4B to Registration Statement
No. 333-16627 on Form S-8, filed with the Commission on
November 22, 1996).
Exhibit 10.6 The Quakertown National Bank Profit Sharing and Section
401(k) Salary Deferral Plan. (Incorporated by reference to
Exhibit 4C to Registration Statement No. 333-16627 on
Form S-8, filed with the Commission on November 22, 1996).
Exhibit 11 Statement Re: Computation of Earnings Per Share. (Included
in Part I, Item I, hereof.)
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QNB Corp.
Date: May 12, 2000 By:
------------ ---------------------------
Thomas J. Bisko
President/CEO
Date: May 12, 2000 By:
------------ ---------------------------
Robert C. Werner
Vice President
Date: May 12, 2000 By:
------------ ---------------------------
Bret H. Krevolin
Chief Accounting Officer
20
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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<DEPOSITS> 286,684
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